Friday, October 3, 2008

Price as a Quality Signal

Demand curves are important, but boring. Making students learn that people buy less of the a product as its price rises is non-controversial and uninteresting. Yet there are a number of interesting aspects about demand and price that we do not discuss in class.

Dan Ariely showed that fake medicine with a high price is more effective than fake medicine with a low price. The placebo effect is real, and more real as its price rises. Demand may slope downward when quality is held constant, but if price is a signal of quality, price is not held constant along the demand curve.

Another showed that people like the same bottle of wine more the more they pay for it. And they were not just saying they liked it better because it had a higher price, brain scans revealed they really do like it better!

These interesting findings do not necessarily help illustrate any economic concept, but they are interesting, and interesting helps keep students awake.